Good morning, welcome to the third quarter presentation for the Orkla Group. My name is Bjørn M. Wiggen, and I'm the President and CEO of Orkla. What we are going to present today, we will reiterate some of the key strategic messages from the investor day. I will present the highlights from the quarter and the short-term outlook. My colleagues will present Sapa and Orkla Brands, Svein Tore Holsether with Sapa, and Torkild Nordberg with Orkla Brands.
Even if a lot of you have heard the presentation from the investor day, I would just like to repeat some of the main points, as those are the important strategy from which we are following currently within the group. The main issue was that we will now in the long run focus on being a branded goods company, and that we will allocate our capital towards the branded goods area. If you see the distribution of profits as they are as of the third quarter this year, we can see from this chart that around 60% is coming from our branded goods area.
Within that area, we are focusing on continuing what has been working successfully for a longer period of time, with a focus on operational improvements and also on add-on investments. In addition, we are looking for larger acquisitions within this area. Our primary focus will be and is currently at companies which are within our existing product categories and within our existing geographies. The reason being that this is where we will find the most synergies in combination with our existing operations. We do see that there are opportunities within this area.
We see that we can see that private equity companies are selling part of their holdings as they would do over a time. We also see that successful family-owned companies can be seeking new ownership. We think that by combining these companies with our existing business, we will establish even stronger leading branded goods company in the Nordics. We think that the companies we could acquire would also strengthen their position in an otherwise financially demanding time. When we are looking at the rest of the current portfolio of holdings within the group, we are working on divesting our share portfolio, Borge and REC holdings.
This is work that will continue, we will obviously announce the development when there is something to talk about and communicate. When it comes to Sapa, our focus is now on improving the profit level within Sapa through operational internal improvements, which we think will lead us to reach the financial targets that we have set for the Sapa business. This will be done before we are seeking a structural solution for Sapa. In all these cases, our main aim is to sustain value to our shareholders. That also means that we obviously will take the market conditions in into account when deciding about the timing for the divestments.
Our hydropower assets, which is the Sauda and Sarpsborg business, at Borregaard, we regard those as financial assets within the group. There are two very different circumstances around those two assets. Sauda is defined the timeline with a 20-year lease on the waterfall rights, while the Borregaard plant can be owned by Orkla forever, delivering strong and stable cash flow. As you will recall, we also announced that we would propose a special dividend to our shareholders of 5 NOK per share.
T hat will decide upon this is on November 3rd, which means that the shares, if decided, will be listed without dividend on November 4th, and the payment will be on November 15th. When proposing for a special dividend, we are looking at our balance sheet in combination with our financial capacity, our expected expansion possibilities, which we are looking at only in the short run, and also the future dividend levels. This is also how we will look at this in the future.
We are dedicated to create long-term value to our shareholders, and our primary goal will be to find investment opportunities where we can create excess shareholder value over time. Going on to the third quarter, we are now for the ninth quarter in a row, we show improvements in the EBITA through operational improvements. EBITA has grown with 9% compared with last year. The revenue has increased by 5%. We do see that Orkla Brands has delivered a satisfactory performance in the quarter, on level with last year.
As indicated earlier, we have worked hard with compensating for the high raw material prices in the prices to our customers. We now see that these raw material prices are fully compensated for in this quarter. We also see that the Russian business is now improving according to expectations. Orkla Brands Russia has positive numbers in this quarter. Sapa is experiencing softer market conditions. The EBITA for this quarter is on level with last year. For the profiles business, we see improvements in the profitability in North America, which is both coming from increased market share and also better operations. In Profiles Europe, we are not improving the margins.
We see an even worse situation in the South European markets. We also see that for Sapa Heat Transfer Sweden, we see a weaker performance, which I'm not satisfied with, and we are working on also improving the operations in that part of the Sapa business. Borregaard delivered another strong quarter. They have more of the advantage of high raw material prices, and there are favorable market conditions, especially for specialty cellulose. This, I think, is the strongest quarter that Borregaard has had. On the share portfolio, we see a return of -15.6%, which is against an index, and the Morgan Stanley Nordic Index had a return of -21.8%.
This is year to date. The net sales of the portfolio so far this year is two and a half billion Norwegian kroner, and the level of the portfolio is now NOK 7.4 billion at the end of September. In accordance with our accounting practice, the investment in REC is written down to the share price as of the end of the quarter, which was NOK 5.24 per share. This has a negative effect in our accounts of NOK 1.8 billion during the third quarter.
The group EBITA development has developed positively with NOK 89 million, with Borregaard Chemicals, the industrial part of Borregaard, being the main contributor to the improved profitability, while both Sapa and Brands were on par with last year during this quarter, which we will come back to later. The total income statement, as mentioned, shows an increase in revenue of 5%, and an EBITDA increase of 9%. Other revenues and expenses are minus NOK 178 million. This is related to further restructuring projects in Sapa to improve the cost positions. The investments in REC and Jotun are presented on the line for associates.
In addition to what I commented on REC, Jotun reported satisfactory volume and sales growth in the quarter, but also higher raw material prices for Jotun resulted in a lower operating profit. The share portfolio had a net loss of NOK 105 million in the quarter, which were related to write downs of NOK 347 million. The cash flow from operations for the group was positive, with NOK 1.2 billion by the end of third quarter. The working capital level is still high in this quarter. We do expect that a seasonal reduction will happen in the Q4, improving the cash flow for that quarter. The net interest-bearing liabilities are decreased to approximately NOK 8 billion by the end of September.
This reduction, which is significant during the year, is mainly related to the sale of Elkem, and also by the reduction of the value of the share portfolio, with the selling out shares from that portfolio. The dividend payment will then obviously increase the debt level by mid-November, with approximately NOK 5 billion. Borregaard is showing continued strong results. We have now favorable market conditions, which results in high prices and increased demand. This means that the EBITDA for the quarter is on an all-time high for this quarter, of NOK 164 million.
The prices for specialty cellulose was maintained at a high level due to demand growth coming from Asia, especially China, which was partly offset by a weaker U.S. dollar. Borregaard has also had a lot of cost improvement programs internally, which now has a full effect in the Borregaard accounts. Borregaard and has a strong and a balanced innovation portfolio and is addressing both the development of the existing products, looking for more, for new specialized products, and also continue to work on process improvements.
On the hydropower, we had a significant drop in the power prices in the September, which results in lower profitability for that period in a month, even if the production was high. This, which we see now, is resulting in higher profit potential for Sauda for the Q4. That the Borregaard energy operation in this period had more or less a result in line with last year. It was slightly lower than last year in this period. To look at the outlook currently, it's a quite challenging task. We do see that the macro picture results in instability and uncertainty in several of our markets.
With our strong focus on the branded goods area in the Nordics, we are not that hard hit. Although, of course, a general negative economic climate is not helpful to the market development in these markets either. For Orkla Brands, it's the raw material prices that has the biggest influence. We do continue to expect volatile raw material prices going forward. We see especially that the sugar prices are on the high level, around 50% increase from last year. For the Sapa, we see that the markets are getting softer.
This means that, as you can see from the numbers, showing a profit at the level of last year, we do not see the effects as much in the accounts as of yet. The issue is that the order books are at a lower level than normal. We also see that in some circumstances, we see that the orders are actually coming, but they are coming later, which means that our planning horizon gets to be shorter. This is because our customers, again, are careful with not having too high stock levels, and that influences the development.
We do expect that we will have a negative effect from the market in the Q4, and that the market development is more negative than it has been in the year so far. Whether that means that it's actually is lower or whether it's flattening out, that's still uncertain. Borregaard Chemicals expect the market conditions to remain strong and good also in the Q4. However, the third quarter is normally a better quarter for the chemicals business. For Borregaard, we expect a more stable development also for the Q4. We will go more into detail on Sapa.
I will start with a market update, then I'll go through the financials by region and segment. I'll then continue on with an update on where we're at on the restructuring initiatives that were announced in second quarter, and also touch upon the further actions taken in third quarter, and what we foresee now going into the Q4 as well, and also go through the short-term outlook for Q4. As you see, this is the comparison, 2010 to 2011. For those of you that were present at the second quarter presentation, you'll see that there is significant softening within all segments compared to where we're at at the second quarter.
For Sapa, we're most exposed to the building and construction segment that in total is about 36% of our total sales. We see a further weakening within that segment and more uncertainty going forward. We also see softening now in the distribution segment in North America, while China is still growing, it is at a lower rate than we've seen in previous quarters. If we then go on and look at the consumption of aluminum extrusion, for those of you that were present at the Orkla Investor Day, this is the same numbers that we presented there, updated by September. We see that we're still significantly below mid-cycle levels. When it comes to Europe, we're 12% below mid-cycle level, in North America, it's 28%.
As you see here, the consumption is down in North America. To clarify, shipments from domestic producers in North America are up, and that's a result of implemented anti-dumping duties into North America or into the US market from China. For Sapa, we have gained market share among the domestic producers as well, so we are growing faster than the other producers in North America. We're reporting increased sales compared to third quarter of 2010. Volume increase of 5% for profiles and 7% within heat transfer.
The performance in North America, and I'll touch a little bit more upon that in a moment, has been satisfactory, we don't see an improvement in our European operations in total. Within heat transfer, we see softening market conditions and a weaker operational performance for our Swedish operations. We're not satisfied with the operational performance at our Finspång facility in Sweden. In addition to that, compared to the third quarter of 2010, we are also impacted by currency. About half of our production within heat transfer is in Sweden, with a Swedish cost base, selling into markets in Europe and the U.S. With the Swedish krona increasing in value compared to US dollar and the euro, we are being hit by that.
We're working to offset some of that going into 2012, we will not see any impact of that in Q4. We announced at the Investor Day that we had signed a letter of intent to acquire Haihong, an extrusion company located outside Shanghai. At the end of the quarter, we signed the agreement to buy the company, we expect the transaction to be completed in Q4. With that acquisition, we feel that we have the footprint in place in Asia, focus now will be on ramp-up and integration of the facilities. If we go through the regions and look at the EBIT margin, as we mentioned, we're quite pleased with the 4.5% EBIT margin year-to-date in North America.
That's a significant increase from where we're at in 2009, where, when we had negative 1.7%. The improvement is more driven by internal improvement than market improvement. 80% of the improvement from 2009 up until today is through internal actions. When it comes to Europe, we're at 2.1% EBIT margin year to date, and in total, we're not pleased with the performance for Europe. We have areas within Europe that are performing well. Nordic and Central Europe is holding up quite well, but there is significant challenges in Southern Europe.
To counter some of this, we have initiated restructuring programs, we announced at the second quarter a restructuring program for Europe, impacting our operations in Portugal and Denmark. That's already finalized, and we'll start to see impact of that in 2012. We've had discussions with the local union in Belgium for the shutdown of one of the facilities in Belgium. We now have reached agreement with the unions, and we expect a formal signing of that social plan to be in place today. In addition to that, we are taking further actions to reduce cost, and we've taken a charge of NOK 148 million in the third quarter.
We have already made decisions for a further NOK 100 billion that will come in the Q4 to further reduce cost. The total annualized cost improvement from this is in the region NOK 250 million-NOK 300 million, which will be phased in in the course of 2012. Approximately 800 employees will be impacted by this restructuring. The total cost then of NOK 148 million in third quarter and the expected NOK 100 million in Q4, about two-thirds of that is cash, and one-third is non-cash. For the outlook, as Bjørn already touched upon, we are seeing softer markets going into Q4.
As I went through in the end markets as well, we are seeing that all of these are being further reduced. As a result of that, we expect our shipments to go down. Our order books are at a fairly low time horizon now, customers are delaying orders until the last moment. We expect that to continue into Q4. For heat transfer, we expect a flat development now, we will not see a continuation of the increased volume for heat transfer. With regards to result, we expect that Q4 will be weaker than third quarter of this year. Thank you.
Good morning. My name is Torkild Nordberg, and I will present to you the results for Orkla Brands. Oops. This graph, which most of you will know quite well, shows the profit development for Orkla Brands over eight years. This growth has been delivered through a combination of structural and organic growth and development.
Even though there is a very clear and positive, long-term, trend, for the first two quarters of this year, we saw a decline in our profit levels because of soft markets, very steep increases in our raw material costs. Also some specific company challenges, in particular, in our Russian operations. In the third quarter, however, we have been able to reverse this trend. As you can see, we are now very much in line with the last year. We'll come back to the reason for this positive change. Let us first have a look at our Nordic operations over some time.
This graph is showing our profit margins for Orkla Foods Nordic and Orkla Brands Nordic, our fast-moving consumer good companies in this area, and it is highlighting a couple of important aspects. First, the profit margin has been increased by basically close to 3% in quite challenging markets over the last 3-4 years. Secondly, this year's turbulence in the raw material markets have had quite limited effect on our Nordic profit margins in the area of 50 basis points. For our other two business units, Orkla Brands International and Orkla Food Ingredients, there was a significant profit margin decline in the first two quarters.
For both units, I'm happy to say that we see that decline has flattened out during the quarter. As already mentioned, third quarter profit for Orkla Brands is in line with last year. The negative momentum is basically reversed across the board. We are still not helped by demanding markets, cautious and trading-down customers, and also generally lowered consumer confidence in most other markets. The ingredient B2B market appears particularly challenging with both market volumes and prices being lowered, which lead to quite difficult trade-offs between margins and volumes. Our underlying top line growth of 4.5% is coming from price in order to compensate for raw materials. Our volumes in total are stable.
From this slide, you can see quite impressive top-line growth for Orkla Brands International and Orkla Food Ingredients. What you cannot see is also impressive growth for some of our big companies like Stabbur, Pierre Robert Group, Procordia, and Axellus. Orkla Brands Nordic and Orkla Brands International delivered moderate profit increase during the quarter, whereas the two other units were somewhat lower than last year. Our newly merged business Orkla Brands Russia is clearly improving and is delivering black figures during the quarter. Proactively, portfolio changes, price increases, and synergy effect from the merger is gradually coming through. We have on that basis kept our ambition to deliver black figures in Russia for the year as a whole.
Q4 is, as you know, an important quarter for confectionery businesses. Regarding our market shares, we see a mixed picture, but our biggest units, like Stabburet, Procordia, and the Chips Group, are gaining shares during the quarter. We have been increasing our advertising investments in all of our business unit during the quarter and also year to date. As shown on the slide, it is significant increases in raw material costs compared to last year, also in the third quarter, at a level of +25%. Even though the FAO reports a 3% reduction during the quarter in the index from February, the top level so far.
They are still except expecting high volatility on high price level on the raw material markets because of more global demand, more frequent extreme weather situation, and also because of the biofuel industry. This is actually being worsened by some financial speculations and also trade restriction being launched from a number of countries regarding raw materials. One example of the latter is the sugar situation inside the European Union, where it we see enormous increases as already mentioned, plus 50% so far. This will have an impact of other companies outside Norway. This dynamic raw material situation will for, I guess, all food suppliers be a challenge for the years to come.
For Orkla Brands, we do target to fully compensate the raw material cost increases in our pricing. In the first two quarters, we saw some lagging effects of getting the prices through, but this was basically put in balance during the third quarter. Being right at the center of organic growth, we are working extremely hard to increase the market value by launching big news to the market. Innovation, we strongly believe, is the number one source for organic growth and sustainable profit levels. On the slide, you can see some examples of innovation being launched lately. Our innovation processes has never delivered more and more relevant news to the market. Unfortunately, I cannot present all of them to you. You will get the chance of trying two of them after the presentation.
I will just like to highlight one product in the bottom left corner of the slide, coming from MTR in India. That is one product from a bigger range, where we move into a new category in India with our MTR brand. It is a range of South Indian snack, where we do think we can make a difference with our category competence in spices, and certainly also the geographical dimension in a region we know very well, namely the state of Karnataka. The Grandiosa Homemade is as close as to homemade as it could be. It looks like a homemade pizza. It tastes like a homemade pizza. When we presented this to you by first quarter, we have delivered 1 million pizzas of this product.
We have delivered two at close to a retail value of NOK 200 million. The consumers have obviously appreciated that we are doing some part of their homework. For our retail customers, we have been able to increase the value of the pizza category of roughly NOK 100 million, meaning that half of this sale of this new product is actually pure category growth, which to us is in perfect line with our own definition of innovation, namely, delivering more values to the consumers, deliver more value to our customers in the retail trade, and in the end, as humble marketeers, somewhat more value to ourselves. I will show you some examples of our recent commercials before we move into the Q&A session.
[Foreign language] luEn ekte fiskesuppe krever tid. Når suppekraften har kokt inn med hvitvin og fløte. Kuttet opp fersk fisk og grønnsaker, fryser alt raskt ned før jeg fyller det i den her todelte posen. Suppe der, fisk og grønnsaker der.
[Foreign language] Alt jeg trenger å gjøre, er å koke opp suppa med litt melk. Helt til slutt så tar jeg i fisken og grønnsakene, så fisken blir saftig og grønnsakene sprø.
[Foreign language] Stabburet sine kokeklare middagssuppe. De beste suppene ligger i frysedisken.
All right, we open up for questions.
Regarding Sapa, it was mentioned another NOK 100 million in restructuring in Q4. Could you please comment a bit further on what this relates to? More importantly, how do you consider the need for further restructuring programs going into 2012, if we see the soft markets continue?
Want to?
The further restructuring initiatives that we're taking are more spread out. We're taking actions everywhere to counter expected lower demand in Q4. This is both affecting our European operations, but also to some degree in Canada. At present, what I mentioned is are the initiatives that we foresee that we will take with the current outlook for Q4.
Eirik Evenås , Carnegie. Two questions. First, follow up on Martin's question on Sapa. The question is: how long visibility do you have? You talk a lot about the weakening in Q4, but what about 2012? How is the order coming in for 2012? To Torkild, I'm a bit concerned about Orkla Foods Nordic. In the report, you are saying something about Bakers, and I was wondering, what is new in Bakers in Q3 compared to Q2?
All right, to the first on Sapa.
First, outlook, as Bjørn also touched upon, our order books are we are shorter horizon at the moment than we've seen earlier this year. Extending beyond the Q4, at the end of the day, we are impacted by how the world economy in general develops. At the moment, I don't think anyone here has a clear view on what 2012 will look like, we will adjust accordingly.
Okay, thank you.
For Bakers, the operational part is pretty clear. We are losing volume on Bakers, but they are doing a tremendous job of adjusting the cost base to the new volume levels. As such, it actually, it's a relative improvement in Bakers over the last quarter. Regarding structural solutions, there is no news, but as you know, we are looking for new structural solutions for Bakers and working hard on that.
Regarding brands, it's encouraging to see the growth of 4% this quarter. It was mentioned that Stabburet recorded on Axellus had a quite high growth in quarter. Could you please put some color on any of the companies that's lagging or had the softer growth, please?
Yeah, I mentioned one. Bakers is certainly dragging down our total volume figures to be clear about that. The second is our biscuit operation both in Sweden and Norway. We had a terrific last year, and we haven't been able to have the same innovation rate this year as we had last year. We did our biggest launch last year, the launch of the year in Sweden. It's very hard comparables on that business at the moment. That's the two examples.
Is it true that you didn't have any conversations with the largest shareholders in Jotun, before you launched a bid? What was that then, the main goal for your bid?
Well, first of all, we did have talks with the largest shareholders in Jotun. We have very regular talks and a very good cooperation with the other shareholders in Jotun on a regular basis. The reason for making the launch was to make it clear to all the shareholders of Jotun, which now are quite a few, I think around 400. It was absolutely clear to them what kind of level we valued the business at. Look at whether that could create a new situation and a new opportunity for us. At this time, it was then decided by the family shareholders that they would stay, that's, of course, up to them.
Now we are back into a very good working relationship within Jotun.
Your key message from the Investor Day in London was that you're gonna focus your business on the brands. You've also stated that you're looking for buying opportunities. Why is this taking so much time? Is this strategy actually viable, given that you can't prove any acquisitions in a period of 18 months? Thanks.
Well, first of all, I think everybody who was working on those kinds of processes know that it does take time. It's often easy to buy, but it's difficult to buy at the right price and with the right timing. I think that is the main reason. It's not for the lack of opportunities so far. We also want to make sure that these are good solutions, and that we know exactly what we are buying, and that we also have a very solid integration process planned. All these things does take time.
One more additional question, and that is related to REC. It seems to me that you're willing, and I mean, the impression you're getting is that you're willing to get out of it at any cost. I mean, the share price has been declining, about. It's been halving every year, 50% every 3 months or so. It seems to me that, at some stage, you, as the major owner of the company, should stand up and say that, "We're not selling. We're gonna stick to this company. We're gonna build long-term value." I know it is in conflict with your focus strategy, but on the other hand, you should also remember that you have to think of the long-term value for the shareholders. Thanks.
I do definitely agree that it's the long-term value for the shareholders that is the most important. That's why we are also saying that that is priority number 1, is to get to a solution that defends the long-term value for our shareholders. That's why we also need to give ourselves some time to find good solutions.
One question from the web, Signe Høgset. Can you say something about the first 9 months of 2011, and how much Bakers contribute negatively to the EBITA?
Well, I can say it is contributing in a negative way. As I just told you, the rate is actually improved, even though it's still negative numbers.
Any more questions? If not, thank you very much, and.